What You Should Know A B O U T F INANCIAL P LANNING
You may have come across the term “financial planning”recently and wondered what it means. You may havedecided to start your own financial plan but you’re notsure how. Or you may feel it’s time you went to a finan-cial planner for some professional advice. Whateveryour situation, the following information can help youdecide what’s right for you.This brochure explains financial planning and itsbenefits. It describes what you should expect andhighlights the importance of your role in the financialplanning process. The answers to some commonquestions about financial planning are also provided.It’s your future. Plan it! ®
W H AT IS Financial Planning?Financial planning is the process of meeting your life goalsthrough the proper management of your finances. Life goalscan include buying a home, saving for your child’s education orplanning for retirement.The financial planning process, as described by CFP Board, con-sists of six steps that help you take a “big picture” look atwhere you are financially. Using these six steps, you can workout where you are now, what you may need in the future andwhat you must do to reach your goals.The process involves gathering relevant financial information,setting life goals, examining your current financial status andcoming up with a strategy or plan for how you can meet yourgoals given your current situation and future plans. For moredetails on the financial planning process, see page 6.T H E BENEFITS OF Financial PlanningFinancial planning provides direction and meaning to yourfinancial decisions. It allows you to understand how each finan-cial decision you make affects other areas of your finances. Forexample, buying a particular investment product might help youpay off your mortgage faster or it might delay your retirementsignificantly. By viewing each financial decision as part of awhole, you can consider its short and long-term effects on yourlife goals. You can also adapt more easily to life changes andfeel more secure that your goals are on track. 1
CAN YOU DO YOUR OWN Financial Planning?Some personal finance software packages, magazines orself-help books can help you do your own financial planning.However, you may decide to seek help from a professionalfinancial planner if: you need expertise you don’t possess in certain areas of your finances. For example, a planner can help you evaluate the level of risk in your investment portfolio or adjust your retirement plan due to changing family circumstances. you want to get a professional opinion about the financial plan you developed for yourself. you don’t feel you have the time to spare to do your own financial planning. you have an immediate need or unexpected life event such as a birth, inheritance or major illness. you feel that a professional adviser could help you improve on how you are currently managing your finances. you know that you need to improve your current financial situation but don’t know where to start.W H AT IS A Financial Planner?A financial planner is someone who uses the financial planningprocess to help you figure out how to meet your life goals.(See page 6.) The planner can take a “big picture” view of yourfinancial situation and make financial planning recommendationsthat are right for you. The planner can look at all of your needsincluding budgeting and saving, taxes, investments, insurance2
and retirement planning. Or, the planner may work withyou on a single financial issue but within the context of youroverall situation. This big picture approach to your financialgoals may set the planner apart from other financial advisers,who may have been trained to focus on a particular area ofyour financial life.FINANCIAL ADVISERS Who May Work With YouIn addition to providing you with general financial planningservices, many financial planners are also registered as invest-ment advisers or hold insurance or securities licenses that allowthem to buy or sell products. Other planners may have you usemore specialized financial advisers to help you implement theirrecommendations. With the right education and experience,each of the following advisers could take you through thefinancial planning process. Ethical financial planners will referyou to one of these professionals for services that they cannotprovide and disclose any referral fees they may receive in theprocess. Similarly, these advisers should refer you to a plannerif they cannot meet your financial planning needs.ACCOUNTANTAccountants provide you with advice on tax matters and helpyou prepare and submit your tax returns to the InternalRevenue Service. All accountants who practice as CertifiedPublic Accountants (CPAs) must be licensed by the state(s) inwhich they practice.FEEL SECURE THAT YOURGOALS ARE ON TRACK. 3
ESTATE PLANNER Estate planners provide you with advice on estate taxes or other estate planning issues and put together a strategy to manage your assets at the time of your death. While attorneys, accountants, financial planners, insurance agents or trust bankers may all provide estate planning services, you should seek an attorney to prepare legal documents such as wills, trusts and powers of attorney. Many estate planners hold the Accredited Estate Planner (AEP) designation. FINANCIAL PLANNER See page 2 for a description. Many financial planners have earned the CERTIFIED FINANCIAL PLANNERTM certification, or the Chartered Financial Consultant (ChFC) or Personal Financial Specialist (CPA/PFS) designations. Financial planners can take you through the financial planning process. INSURANCE AGENT Insurance agents are licensed by the state(s) in which they practice to sell life, health, property and casualty or other insurance products. Many insurance agents hold the Chartered Life Underwriter (CLU) designation. Financial planners may identify and advise you on your insurance needs, but can only sell you insurance products if they are also licensed as insurance agents. GET THEBIG PICTURE APPROACH TO ACHIEVING YOUR FINANCIAL GOALS. 4
INVESTMENT ADVISERAnybody who is paid to provide securities advice must registeras an investment adviser with the Securities and ExchangeCommission or relevant state securities agencies, dependingon the amount of money he or she manages. Because financialplanners often advise people on securities-based investments,many are registered as investment advisers. Investment advis-ers cannot sell securities products without a securities license.For that, you must use a licensed securities representative suchas a stockbroker.STOCKBROKERAlso called registered representatives, stockbrokers arelicensed by the state(s) in which they practice to buy and sellsecurities products such as stocks, bonds and mutual funds.They generally earn commissions on all of their transactions.Stockbrokers must be registered with a company that is amember of the Financial Industry Regulatory Authority (FINRA)and pass FINRA-administered securities exams.BE SUREYOU’RE GETTING Financial Planning AdviceThe government does not regulate financial planners as financialplanners; instead, it regulates planners by the services theyprovide. For example, a planner who also provides securitiestransactions or advice is regulated as a stockbroker or invest-ment adviser. As a result, the term “financial planner” may beused inaccurately by some financial advisers. To add to theconfusion, many of the financial advisers described on pages 3through 5 can also offer financial planning services. To be surethat you are getting financial planning advice, ask if theadviser follows the six steps described on the next page. 5
THE FINANCIALPLANNING PROCESS Consists of the Following Six Steps1ESTABLISHING AND DEFINING THE CLIENT-PLANNER RELATIONSHIP. The financial planner should clearly explain or document the services to be provided to you and define both his and your responsibilities. The planner should explain fully how he will be paid and by whom. You and the planner should agree on how long the professional relationship should last and on how decisions will be made.2GATHERING CLIENT DATA, INCLUDING GOALS. The financial planner should ask for information about your financial situation. You and the planner should mutually define your personal and financial goals, understand your time frame for results and discuss, if relevant, how you feel about risk. The financial planner should gather all the necessary documents before giving you the advice you need.3ANALYZING AND EVALUATING YOUR FINANCIAL STATUS. The financial planner should analyze your information to assess your current situation and determine what you must do to meet your goals. Depending on what services you have asked for, this could include analyzing your assets, liabilities and cash flow, current insurance coverage, investments or tax strategies.6
4DEVELOPING AND PRESENTING FINANCIAL PLANNINGRECOMMENDATIONS AND/OR ALTERNATIVES. The financial planner should offer financial planning recommendations that address your goals, based on the information you provide. The planner should go over the recommendations with you to help you understand them so that you can make informed decisions. The planner should also listen to your concerns and revise the recommendations as appropriate.5IMPLEMENTING THE FINANCIAL PLANNING RECOMMENDATIONS. You and the planner should agree on how the recommenda- tions will be carried out. The planner may carry out the recommendations or serve as your “coach,” coordinating the whole process with you and other professionals such as attorneys or stockbrokers.6MONITORING THE FINANCIAL PLANNING RECOMMENDATIONS. You and the planner should agree on who will monitor your progress towards your goals. If the planner is in charge of the process, she should report to you periodically to review your situation and adjust the recommendations, if needed, as your life changes. YOU AND YOUR PLANNER SHOULD M UTUALLY DEFINEY O U R PERSONAL AND F INANCIAL GOA LS. 7
B E S T PRACTICES When Approaching Financial Planning1 Set measurable goals.2 Understand the effect your financial decisions have on other financial issues.3 Re evaluate your financial plan periodically.4 Start now – don’t assume financial planning is for when you get older.5 Start with what you’ve got – don’t assume financial planning is only for the wealthy.6 Take charge – you are in control of the financial planning engagement.7 Look at the big picture – financial planning is more than just retirement planning or tax planning.8 Don’t confuse financial planning with investing.9 Don’t expect unrealistic returns on investments.10 Don’t wait until a money crisis to begin financial planning.YO U A RE TH E FOCUSO F T H E FI NA NCIALPL A N NING PROCESS.
H OW TO MAKE Financial Planning Work For YouYou are the focus of the financial planning process. As such,the results you get from working with a financial planner areas much your responsibility as they are those of the planner.To achieve the best results from your financial planningengagement, you will need to be prepared to avoid some ofthe common mistakes by considering the following advice: SET MEASURABLE FINANCIAL GOALS. Set specific targets of what you want to achieve and when you want to achieve results. For example, instead of saying you want to be “comfortable” when you retire or that you want your children to attend “good” schools, you need to quantify what “comfortable” and “good” mean so that you’ll know when you’ve reached your goals. UNDERSTAND THE EFFECT OF EACH FINANCIAL DECISION. Each financial decision you make can affect several other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. Or a decision about your child’s education may affect when and how you meet your retirement goals. Remember that all of your financial decisions are interrelated. RE EVALUATE YOUR FINANCIAL SITUATION PERIODICALLY. Financial planning is a dynamic process. Your financial goals may change over the years due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth, house purchase or change of job status. Revisit and revise your financial plan as time goes by to reflect these changes so that you stay on track with your long term goals. 9
START PLANNING AS SOON AS YOU CAN.Don’t delay your financial planning. People who save orinvest small amounts of money early, and often, tend to dobetter than those who wait until later in life. Similarly, bydeveloping good financial planning habits such as saving,budgeting, investing and regularly reviewing your financesearly in life, you will be better prepared to meet life changesand handle emergencies.BE REALISTIC IN YOUR EXPECTATIONS.Financial planning is a common sense approach to managingyour finances to reach your life goals. It cannot change yoursituation overnight; it is a lifelong process. Remember thatevents beyond your control such as inflation or changes inthe stock market or interest rates will affect your financialplanning results.REALIZE THAT YOU ARE IN CHARGE.If you’re working with a financial planner, be sure youunderstand the financial planning process and what theplanner should be doing. Provide the planner with all of therelevant information on your financial situation. Ask questionsabout the recommendations offered to you and play an activerole in decision-making.
COMMON QUESTIONS About Financial PlanningQ WHO CAN USE THE TERM “FINANCIAL PLANNER”?A The government does not regulate financial planners as financial planners; instead, it regulates planners as stock brokers, insurance agents or investment advisers, depend- ing on the services they provide. (See page 5.) As a result anybody can “hang out a shingle” and call himself or herself a financial planner. CFP Board’s free brochure, 10 Questions to Ask When Choosing a Financial Planner, can help you look for someone who is qualified to offer financial planning advice. The brochure contains questions to ask during an initial interview with a planner to help you determine if he or she is right for you.Q WHY SHOULD I CHOOSE A FINANCIAL PLANNER OVER ANOTHER TYPE OF FINANCIAL ADVISER?A A financial planner should focus on your needs first before recommending a course of action. Most planners have been trained to take a broad look at your financial situation, while accountants, investment advisers, stockbrokers or insurance agents may focus on a particular area of your financial life. Always ask a financial adviser what qualifies him or her to offer financial planning services. See pages 3 through 5 for descriptions of different types of financial advisers.Q WHAT IS THE BEST AGE TO START FINANCIAL PLANNING?A While it is true that the younger you start the more beneficial the process will be, financial planning is worthwhile at any age. Although younger people may have more decisions to make regarding their financial lives, changing laws and circumstances can lead middle-aged people and seniors to have to adjust their financial plans as well. Changes in tax law, for example, may require many people to revisit certain investments or estate plans, and adequate disability planning becomes more important as people age. 11
Q HOW ARE FINANCIAL PLANNERS PAID?A There is currently no uniform method by which financial planners are paid. A planner can be paid by a salary paid by the company for which the planner works; by fees based on an hourly rate, a flat rate, or on a percentage of your assets and/or income; by commissions paid by a third party from the products sold to you to carry out the financial planning recommendations; or by a combination of fees and commissions whereby fees are charged for the amount of work done to develop financial planning recommenda- tions and commissions are received from any products sold. Be sure to ask the planner how he or she is paid.Q DO I HAVE TO PAY A FINANCIAL PLANNER FOR THE FIRST INTERVIEW? HOW MUCH DOES A PLANNER TYPICALLY CHARGE?A Most financial planners will provide you with one free half-hour or hour meeting to talk about your reasons for wanting to work with them. During these initial inter- views, the planners will also decide if they can help you and explain how they would work with you. Like other professionals, the rates financial planners charge depend on their experience, geographic location, level of services and your needs. Interview more than one planner to get an idea of the going rate for financial planning services.12
BY VIEW ING EACHF INA NCIAL DECISIONA S PART O F A WHOL E, YOU CAN C ONSIDER IT S S HO RT AN D LONG -TERM EFFEC T SO N YOUR L IF E G OAL S.